James D. Epstein Quoted in the Ambulatory M&A Advisor Article, 'Transaction Insurance: Beyond Indemnification'
James D. Epstein, a partner in the Commercial Department of Pepper Hamilton, was quoted in the May 27, 2016 Ambulatory M&A Advisor article, "Transaction Insurance: Beyond Indemnification."
James Epstein, partner with Pepper Hamilton believes that transaction insurance is becoming a growing trend that a lot of people are taking advantage of; however, not everyone is taking advantage of it.
“The reason is that it tends to truncate some of the discussions that buyers and sellers have about the extent of representations and warranties that are provided in a transaction since the exposure of the seller is generally quite limited as compared to a traditional transaction where they provide a full indemnity from 5 to 20 percent of the total purchase price,” Epstein says.
“In this case, oftentimes their exposure is limited to one percent or so of the aggregate purchase price for the transaction. There are some costs associated to offset that. Ordinarily those costs are split between the buyer and seller, but at the end of the day the seller’s exposure is much less than it would typically be in a traditional deal.”
Epstein adds that buyers are also typically able to obtain some greater protections than they might otherwise be able to obtain directly from a seller.
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Epstein echoes that and says that typically, transaction insurance comes into the picture if a company is sold through an auction process.
“Nowadays, a lot of sellers are going out and saying they want the buyer to obtain rep and warranty insurance. That’s the start of the process. There are two different kind of policies, a buyer’s policy and a sellers’ policy,” Epstein says, emphasizing the buyer policy.
In a buyer’s policy, Epstein says the seller essentially says to the potential buyer that they want them to obtain rep and warranty insurance. Then, what will happen is the buyer will retain a broker or consultant and they will scrub the marketplace and seek quotes from a series of different companies. Depending upon how robust the markets are, and how busy the insurance companies are, the buyer can see anywhere from one to six quotes on each deal.
“Those are preliminary numbers, and what then happens is the buyer really has to pick a horse that they want to ride. That company will then piggyback on the diligence that is being done by the buyer since they will want to review legal reports, financial reports, and other consultant reports that the buyer has sought to be generated in the transaction. Then they will do some of their own digging around and ultimately come back with a more developed proposal which will have costs, deductibles, exclusions. Some typical exclusion includes wage and hour claims, healthcare regulatory claims. There are some areas and some types of transactions where insurance really is not a product that can generally be used. One of those is the healthcare field. There are some people who are working on products to try and bridge that gap and fill the void,” Epstein says.
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Epstein explains that the typical kind of transaction is a middle market transaction where there is an enterprise value from 100 to 500 million dollars.
“Oftentimes you will see insurance that covers about ten percent of the enterprise value of a transaction. So, you are getting coverage for 10 to 50 million dollars of potential exposure. That is the sweet spot of the transaction. You can do larger transactions by layering different insurance companies on top of each other. It tends not to work for the smaller transactions because pricing becomes a little bit prohibitive in that case,” he says.
Content contributed by attorneys of Troutman Sanders LLP and Pepper Hamilton LLP prior to April 1, 2020, is included here, together with content contributed by attorneys of Troutman Pepper (the combined entity) after the merger date.